The U.S.-South Korea FTA: A Defining Moment

The U.S.-South Korea FTA: A Defining Moment

U.S. and South Korean negotiators have struck a landmark trade
deal in the Korea-U.S. Free Trade Agreement (KORUS FTA). If
ratified, the agreement will provide American workers and
businesses with new opportunities and serve as a powerful statement
of the U.S. commitment to East Asia. But although the deal would
eliminate more than 90 percent of all tariffs within three years,
it will face considerable opposition in the U.S. Congress and South
Korean National Assembly--particularly over trade in the sectors
that were contentious during negotiations, such as agriculture,
automobiles, and pharmaceuticals. Presidents George Bush and Roh
Moo-hyun must exercise strong leadership and explain the FTA's
benefits to gain public and legislative support. Passage would mean
a new era for U.S. economic engagement with East Asia and expanded
opportunities for the American economy. Failure, however, would
strike a blow to a key alliance that would reverberate for decades
to come.

Big Benefits

The Korea-U.S. Free Trade Agreement--the largest signed by the
U.S. since the North American Free Trade Agreement in 1994--is a
milestone in broadening the U.S.-South Korea relationship beyond
the military alliance. It is expected to increase the countries'
robust $75 billion annual bilateral trade by an additional $20
billion. The FTA would give U.S. business another important
bridgehead into the Asian market, counterbalance South Korea's
growing trade ties with China, and potentially allow the U.S. to
regain its position as Seoul's preeminent trade partner. For Seoul,
the agreement will improve South Korea's economic freedom by
locking in additional economic reforms. It may also give a boost to
South Korea's credit ratings and give the country a competitive
advantage over regional rivals China and Japan.

Despite South Korea's great reliance on trade and exports for
the vitality of its economy, the FTA's negotiations underscored
South Koreans' continuing ambivalence about opening the country's
markets. South Korea's heated debate over ratifying its first trade
deal with Chile suggests that debate over the KORUS FTA review will
be even more raucous. Continuing suspicion of U.S. motives has
allowed opponents to tap into latent anti-American emotions to
generate fierce anti-FTA demonstrations.

Trade Concessions and Political
Cover

Only political deliberation will determine whether the
compromises struck by negotiators can withstand the scrutiny of
Congress or whether additional fine tuning will be needed in the
implementation language. In negotiations, the U.S. gained
politically sensitive concessions on beef and autos. Senator Max
Baucus (D-MT), a strong trade proponent, had threatened to oppose
the FTA if Seoul did not agree to resume imports of U.S. beef.
South Korea had been the third largest importer of U.S.
beef--accounting for 200,000 tons in 2003--prior to halting imports
in December 2003 following discovery of mad cow disease in the U.S.
Still, lingering public health concerns may slow the growth of
trade in beef. South Korean agricultural groups will protest the
policy change for its effect on their livelihoods. Domestic beef
prices may drop 40 percent after the reintroduction of U.S.
imports, and the lower prices could cause downward pressure on
chicken and pork prices as consumers shift to lower-priced
beef.

Similarly, failure to gain greater access to the South Korean
auto market was highlighted as a deal breaker by senior Democrats
in the House of Representatives. It is not yet clear whether the
concessions gained will be sufficient to placate auto proponents.
U.S. auto manufacturers remain skeptical of South Korean promises,
which the industry claims have been broken in the past or coupled
with new non-tariff regulatory barriers. And Detroit may be more
concerned about foreign-manufactured auto parts than about gaining
greater market share for car sales in South Korea. South Korea
exported 700,000 cars to the U.S. last year while importing only
5,000. Only 2.7 percent of cars sold in South Korea are imports,
the lowest figure among OECD countries.

In South Korea, the exclusion of rice from the FTA is a
political victory for the Roh administration, though not for South
Korean consumers who will continue to pay four times the world
market price for rice. Rice is a highly emotional issue for South
Koreans, transcending economic factors. It remains a staple of
Koreans' diet, and the country venerates the historic image of the
farmer, though the profession is in decline.

The countryside is overly represented in South Korea's National
Assembly, with one representative per 30,000 people in rural areas,
as opposed to one representative per 300,000 people in urban areas.
Farmers wield political power beyond their numbers and have been
the most active in their opposition to the FTA. To reduce domestic
opposition, Seoul will promise new governmental assistance programs
to affected industries.

Tough Challenges Ahead

Although the FTA has been completed and enjoys strong support
from business in both countries, it faces formidable obstacles to
ratification in the U.S. Congress and the South Korean National
Assembly. President Roh Moo-hyun will have to work hard to gain a
sufficient majority within the National Assembly to secure
ratification. He will face greater opposition from within his
ruling Uri Party than from the traditionally pro-business Grand
National Party. The minority opposition Democratic Labor Party and
Democratic Party are vehemently opposed to the FTA, as are minority
factions within both the Uri and GNP. There is probably enough
support to win ratification. President Roh will be challenged,
however, by his own declining political influence and a legislature
increasingly divided by partisanship during a presidential election
year.

Conclusion

Neither country achieved all that it sought during negotiations,
and the FTA's impact on individual trade sectors will be uneven.
This is, unfortunately, the nature of trade negotiations. Achieving
a level playing field in trade requires overcoming public fears and
protectionist inclinations. Both sides sought to protect their rice
bowls. But overall, the KORUS FTA serves the national interests of
both countries by equitably expanding bilateral economic
opportunities through free trade.

Presidents Bush and Roh must exert strong leadership to
highlight the broad advantages of the deal to convince legislators
to look beyond their parochial interests. President Roh has taken a
principled stand against those who advocate maintaining outdated
protectionist barriers--including members of his own party.
President Bush should press the U.S. Congress to embrace the
strategic advantages of strengthening the U.S.-South Korea
bilateral relationship through approving the KORUS FTA.

Bruce Klingner is Senior
Research Fellow for Northeast Asia in the Asian Studies Center, and
Anthony B. Kim is Policy
Analyst in the Center for International Trade and Economics, at The
Heritage Foundation.